Treasury Still Doubtful on Tax Holiday

By

John D. McKinnon

Feb. 17, 2011 2:35 p.m. ET

Amid a growing corporate push for a tax holiday, the Treasury Department's top tax official reiterated concerns about letting U.S. multinationals bring home hundreds of billions of dollars in overseas profits at low tax rates.

For decades, U.S. tax policy has allowed multinational corporations to defer taxation of much of their overseas earnings until the money is brought home—or repatriated—to the U.S. By now, more than $1 trillion of U.S. corporate earnings is parked offshore, according to estimates. But companies have been reluctant to bring it back to the U.S., because of the relatively high U.S. tax rates they face.

Michael Mundaca,
the assistant Treasury secretary for tax policy, said the Obama administration views repatriation of corporate overseas earnings as a part of broader corporate tax reform, not as an alternative.

"We're focused on a more permanent solution," Mr. Mundaca said, in a question-and-answer session with business tax executives. The event was organized by the Tax Council Policy Institute.

As corporate cash has built up overseas, a number of U.S. multinationals have pushed for a temporary tax holiday that would allow them to bring home the money at reduced tax rates. They succeeded once before, in 2004, and are hoping for another tax holiday this year, particularly if comprehensive corporate tax reform stalls in Congress. President Barack Obama was expected to hear himself from high-tech executives on a West Coast swing starting later Thursday.

Critics of the idea—including in the Obama administration—worry that it would reduce momentum for a broader overhaul.

Mr. Mundaca also suggested that the administration is open to broader changes in the way the U.S. taxes multinationals' overseas income. Most other large economies don't attempt to tax their multinationals' international income at all.

But Mr. Mundaca suggested the administration is worried that switching to such a tax system might allow companies to reduce their domestic tax bills too much, without proper safeguards relating to expense deductions. Some business executives say they worry that such safeguards could harm their competitiveness, however.

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